Qualifying for the tax incentives

To qualify for the tax incentives, investors must have purchased new shares in a company that meets the requirements of an ESIC immediately after the shares are issued. The shares must be issued on or after 1 July 2016. If the shares are issued as a result of converting the convertible notes, it is the date of the conversion that is relevant.

If, after the company has satisfied these requirements, it ceases to be an ESIC, this won't affect the investor's entitlement to the early stage investor tax incentives for the shares.

The early stage investor tax incentives aren't available to you if:

• you didn't purchase the shares in the ESIC directly from the company as newly issued shares
• the shares are not equity interests in the ESIC
• you are an early stage venture capital limited partnership
• you are a widely held company or a wholly-owned subsidiary of a widely held company (a widely held company is either a company that is listed on an approved stock exchange or a company with more than 50 shareholders – unless certain requirements are met).
• your total investment in one or more ESICs for the income year is more than $50,000 and you didn't meet the sophisticated investor test in relation to at least one of those share offerings
• you or the ESIC are affiliates of each other at the time the shares are issued (An individual or company is an affiliate of another entity where, in relation to their business affairs, the individual or company acts or could reasonably be expected to act in accordance with that entity's directions or wishes or in concert with the entity.)
• you hold equity interests in the ESIC (including any entities connected with the ESIC) immediately after you are issued with the new shares that carry the right to  
  • receive more than 30% of any distribution of income or capital by the company or the entities, or
  • exercise, or control the exercise of, more than 30% of the total voting power in the company or the entities
  • (an entity is connected with the ESIC if the entity controls, or is controlled by, the ESIC, or both entities are controlled by the same third entity).
   
• you acquired the shares under an employee share scheme or by exercising a right you acquired under an employee share scheme . 

The early stage investor tax incentives are available to both Australian resident and non-resident investors.

If the investor is a trust or partnership, special rules apply so that the entitlement to the tax offset and the modified CGT treatment flow through to the member of the trust or partnership (or the ultimate member if there is a chain of trusts or partnerships). The tax offset will not flow through to the member if the member is a widely held company or a wholly-owned subsidiary of a widely held company.

If the investor is a superannuation fund, the trustee of the fund – not the fund members – would be entitled to the tax incentives (tax offset and the modified CGT treatment).

The sophisticated investor test

Under the Corporations Act 2001External Link, 'sophisticated investors' who meet certain requirements don't have to be provided with a disclosure document, such as a prospectus or product disclosure statement, when being offered shares in a company.

You may be a sophisticated investor if you:

• (or, if you are a company or trust, your controller under the Corporations Act 2001) hold a certificate issued by a qualified accountantExternal Link that confirms you (or your controller) meet certain asset and income requirements and the certificate is provided no more than six months prior to the qualifying shares being offered to you. As at 19 March 2020, this certificate is available only if you (or your controller) have gross income of at least $250,000 for each of the last two financial years or net assets of at least $2.5 million
• have paid at least $500,000 for the qualifying shares (either as a single offer or including any amounts you previously have paid for shares of the same class that you hold in the same company)
• are offered the qualifying shares through a financial services licensee who is satisfied that you have previous investment experience that allows you to assess the offer and you sign a written acknowledgement that the licensee hasn't given you a disclosure document in relation to the offer
• meet the requirements of being a 'professional investor' under the Corporations Act 2001 (such as a financial services licensee), or
• have or control gross assets of at least $10 million (including any assets held by an associate or a trust that you manage).

As a sophisticated investor, your investments are eligible for the early stage investor tax incentives and are not restricted to the amount you can invest in an ESIC in an income year. However, your early stage investor tax offset is capped at a maximum amount of $200,000 for each income year.

Limits for investors who don't meet the sophisticated investor test

If you don't meet the sophisticated investor test in relation to at least one offer of qualifying shares in an ESIC during the income year, there is a limit on the total amount you can invest to access the tax incentives.

In such a case, your investments in one or more qualifying ESICs in an income year must not exceed $50,000 in total.

If your total investments exceed $50,000, you won't be eligible for:

• the early stage investor tax offset for any of your investments in that income year, or
• the modified CGT treatment for any of your investments in that income year.

This applies to all of the shares that were issued to you in that income year, including to the amount of your investments that are below $50,000.

This limit is intended to ensure that the tax incentives don't encourage retail investors to be over-exposed to the risk that is inherent in investing in qualifying ESICs.

Find out about:

• Calculating the early stage investor tax offset